What goes into designing a captive's investment strategy?
Liquidity comes first, then bonds matched to when claims fall due.
According to Jack Meskunas, Managing Director at Oppenheimer, liquidity is extremely important in a captive, particularly where claims are frequent and small. He describes a progression from a cash buffer for operating bills, into fixed income of varying maturities, with bonds timed to mature roughly when claims are expected. He is blunt that holding everything in a money market would be the wrong answer.
Meskunas frames the design question with a deliberately absurd version of it. If the only thing a captive cared about was paying claims, he says, you would hold everything in a money market and own the world's most expensive savings account, since you would be paying captive fees around what amounts to a deposit.
So liquidity is a floor rather than a strategy. There needs to be a certain amount of it, and for immediate needs that can be as simple as a money market fund.
Key takeaways
Liquidity matters most where claims are frequent and small.
A cash buffer covers operating bills so investments are not sold to pay them.
Bond maturities are typically matched to when claims are expected to fall due.
Above that sits operating cash, so the captive is not selling investments to pay rent, the actuary or the accountant. Then typically fixed income: corporate and government bonds of varying maturities.
The organising idea is asset liability matching. Where claims are expected in a given year, the aim is to have bonds maturing that year to pay them. Meskunas gives a property example where losses may cluster in winter as pipes burst, and notes property is short tail, meaning claims need paying quickly rather than waiting years for litigation to settle as they might in a casualty line.
How the portfolio is layered
Each layer answers a different question about timing.
- 01Money market for immediate needs.
- 02Operating cash so investments are not sold to pay bills.
- 03Fixed income of varying maturities.
- 04Maturities matched to expected claim timing.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“liquidity is extremely important in a captive, particularly for those high frequency, low severity types of claims”
This answer begins at 12:50 of the full conversation. Watch or listen to the whole thing.
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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